Wednesday, July 2, 2014

Why Is Macro So Hard: Answering the Heuristic Question Instead of the Target Question

Dan Kahneman, a psychologist, won a Nobel Prize in economics for his insights about how the psychological quirks we all share can lead us to bad economic choices.

Here’s one of the things we do that has big effects on how we think about macroeconomics.

We’re posed with a tough question that needs to be answered. This is called the target question.

Because the target question is difficult, we substitute an easier question that we can answer. This is the heuristic question.

Here’s where things get weird: we then claim that our answer to the heuristic question is the answer to the target question.

The current example of this is our debates on inequality. The target question is whether or not reducing inequality would be a net benefit to society. That’s a tough one.

Now, think about this. When most people think about this question, does their answer run deeper than this: “reducing inequality would make me feel better about my place in the world”?

This is the answer to a heuristic question. Note that it doesn’t really even matter much what the heuristic question is: I didn’t even have to state the question, and yet you’re probably nodding your head that I’m on to something here.

This is a big problem for two reasons.

First, it’s amazingly widespread. I’d go so far as to say this is why students are generally weak at solving word problems in classes.* You have to admit this is a very pervasive phenomenon, right? Well, I can tell you from personal experience that the biggest problem in coaching students through word problems in office hours is their insistence that the answer they’ve gotten after some step is the one they needed to go on to the next step. (Don’t believe me? Go view the infamous Chelsea video and — unlike every other time you’ve watched this — focus on the answers she does provide to questions that aren’t asked).

Secondly, it works sometimes. Consider this target question posed by the Nazis: Germany would be a better place without Jews, Gypsies, homosexuals, people with birth defects and mental illnesses, and a whole lot of random Slavs. Actually answering this question would be rather difficult: you’d need a controlled experiment, with genocide in one country, and no genocide in another, and then you’d need to wait a century or so to see which one turned out “better”. That’s nuts. The answer to the heuristic question — is it OK to practice genocide — is pretty easy: NO!

The problem with macroeconomics is that the target questions that concern us are widespread, but not as transparent as the question posed to Chelsea. But it’s also that we apply heuristic moral responses to questions that probably do have objective answers.